How does VWAP compare to the Kalman filter? Using the same HSBC trades as the
previous chart, we calculate the volume weighted average price at each trade
time, covering all trades in the previous five minutes. Then plot the last VWAP
figure in each five minute time period to match the previous time series.

Chart 1: HSBC Holdings (0005.HK) through August 29, 2014. The dark
line is the last traded price at the end of each five minutes of continuous
trading. The blue line is the Kalman filtered price. The red line is the
5 minute VWAP.

The chart above shows that, like the Kalman filtered price, the moving VWAP
also tracks the traded price, but the differences are noticeably larger. The
average absolute difference from the last traded price is HKD 0.0152 for the
Kalman filter and HKD 0.0235 for the 5 minute VWAP. That is around a third of a
tick and half a tick respectively. A difference is to be expected, since VWAP is
accounts for the volume traded at each price. Another point to consider when
using VWAP is how wide the time window should be: the five minutes figure is
arbitrary, albeit straightforward for clients to understand, and should instead
be related to the the trading intensity of the listing. Which, of course, can
vary during the day.